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LNM hunting for coal:Will the Chinese act a spoilsport?

On May 24 after the trading hours a mystery investor was reported buying nearly 10 per cent stake in Macarthur Coal, one of the top five companies in that sector in Australia. The stake was bought at $20 a share, a premium of eight per cent. The next day, it became clear that the mysterious buyer was the richest Indian steel tycoon L.N. Mittal. Mittal announced that he had picked up 14.9 per cent stake in Macarthur Coal. The average payout for him worked to $19.96 a share. Providing space for Mittal’s play in the company were Nathan Tinkler, a racing enthusiast who sold his entire 10.4 per cent stake in the company, and Ken Talbot, Macarthur’s founder who offloaded 4.27 per cent stake. Talbot can still continue calling shots in the company’s affairs with a nearly 16 per cent stake. Immediately after buying these stakes, Mittal said he was interested in buying the entire company.

If Mittal manages to do that his total cost for Macarthur would be around $5 billion. The deal would help Mittal meet his huge appetite for coal for his steel empire. Australia’s FIPB would have to approve the acquisition. Australian foreign investment rules look a little simple. Any foreign investment can be made into a company up to 14.9 per cent without prior approval. After that, the FIRB will have to take a call. The board’s decision will be based on whether the takeover move is in Australia’s interest. Australia rarely shoots down any proposal to buy over a company. One recent instance is the rejection of the takeover of a liquefied natural gas producer by the Dutch firm Shell.

For Mittal, the buying is seen a strategic one since it would ensure supply for his steel mills in various parts of the globe. A speculation doing the rounds is that he could source coal for his greenfield Indian project. The move also follows his decision to buy three coking coal mines in Russia for $718 million. Prices of coking coal, used by steel mills world over, has more than doubled to over $300 a tonne f.o.b currently, while the coal known as pulverised coal injection (PCI) has trebled to $250 a tonne delivered.Coal prices were estimated to decline 25 per cent in short term, but supply constraints and limited port access have kept the rates stable.

Mittal’s steel mills produce 60 million tonnes (mt) products and output is likely to increase to 120 mt by 2012. Arcelor Mittal is Macarthur’s biggest client in buying PCI coal. Macarthur, which has said it could end up with a profit of $75 million this fiscal (July 2007-June 2008), produces 3.6 mt of coal every year and is seen increasing it to five mt by 2012.

Macarthur would help Mittal in diversifying his steel production into ferro alloys and molybdenum. The stake purchase is also seen as one to nip in the bud the efforts of the big four coal companies – BHP Billiton, Rio Tinto, Xstrata and Anglo American – to take a strangle hold of supply. If he wants to buy the company, it is possible that Mittal may have to pay a little more for the extra port capacity that is available to Macarthur. But there could be a stumbling block since China’s CITIC holds 17.6 per cent stake in the company. The Chinese firm could retain its stake to prevent the Indian takeover but it is also seen as a non-strategic investment that may, on behalf of the Chinese Government, block the dominance of the big four coal firms. On the other hand, it has totally stopped Xstrata’s takeover bid of Macarthur. “Finally, the buying of Macarthur by Arcelor Mittal will have to be seen whether it is in commercial interest or supply security,” said an industry expert. A section of the Australian media has termed this move of Mittal as a “Sino-India resource war”. But others see this as part of the steel major’s rush across-the-globe scrambling for coal supply.
Indian Group To Lift Stake In Lincoln
Lincoln Minerals says Indian iron ore miner Mineral Enterprises plans to increase its stake in the junior explorer and its flagship Gum Flat project in South Australia.
Mineral Enterprises, which holds 4.7 per cent of the junior, plans to lift its stake in the company to 19.99 per cent by partially underwriting a proposed $4.9 million capital raising.
In addition, Mineral Enterprises will increase its interest in Lincoln's Gum Flat iron ore project to 50 per cent by providing a further $2 million in project finance.
Lincoln has a number of projects prospective for iron ore, nickel and uranium across the southern Eyre Peninsula in SA.

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